Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board

Chapter 13
The Producer Owned Reinsurance Company (PORC)
Introduction
It is common in the auto dealership industry for a dealer to own an insurance company whose
primary function is to reinsure the related dealership’s risks under aftersale insurance contracts.
Normally, a dealer who owns all or a significant portion of the dealership will own all or a
significant portion of the reinsurance company. The dealer usually has a promoter form the
reinsurance company. These companies may file a Form 1120-PC, a Form 1120-L or a
Form 990. The reinsurance company is generally incorporated in a jurisdiction such as Arizona or
the Turks and Caicos Islands due to less restrictive formation requirements. This corporation is
generally not qualified to do business in the dealer’s home state.
A company having these characteristics is known in the auto industry as a "Producer Owned
Reinsurance Company" (PORC). The PORC may be referred to as a brother-sister "captive"
because it is usually not owned by the dealership. However, since the dealer and not the
dealership owns the reinsurance company, it may not technically be a true "captive."
Introduction to Reinsurance
Reinsurance may be found in all aspects of dealership aftersale insurance products. It is prevalent
in the areas concerning credit life and credit health and disability products. In the dealership
context reinsurance often involves dealer owned offshore reinsurance companies.
The primary function of a PORC is to reinsure the risks of business initially placed with an
unrelated insurance company, known as the fronting company. Reinsurance is the transfer of risk
from one insurance company to another. Reinsurance is common with dealership aftersale
insurance products, primarily vehicle service contracts and credit life and disability insurance.
This arrangement allows the dealer an opportunity to maximize the earnings on these products
through underwriting profits and return on investments. In return for processing the business to
the PORC, known as ceding, the fronting company charges an administrative fee at a
predetermined percentage or portion of the premium. When the fronting company cedes the
business, it is permitted to reduce its reserves, subject to certain conditions, for that portion of the
transferred risk.
It is as though there is not reinsurance until the reinsurer receives the profits. This alleviates the
need for the reinsurance company to maintain a reserve.
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